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16 Roth IRA Facts

1. Contributions are made only on a non-deductible basis – the tax benefit is realized when funds are withdrawn because you pay no taxes on earnings. Great news!

2. Contribution limits are adjusted annually as follows:

Year

Age 49 and below

Age 50 and above

2006–2007

$4,000

$5,000

2008

$5,000

$6,000

The facts in here are for 2008. Current limits change in each tax year .

3. The Roth IRA is only available to those whose income is below a certain level:

— Single filers with an income of up to $99,000 qualify for a full contribution; incomes of between $99,000-$114,000 qualify for partial contribution.

— Joint filers with an income of up to $156,000 qualify for a full contribution; incomes of between $156,000-$166,000 qualify for partial contribution.

— The numbers here change each year, so check IRS rules each year.

4. Contributions are permitted after age 70.5 as long as the individual or the individual’s spouse has earned income.

5. There is no requirement that withdrawals commence at age 70.5.

6. Contributions are not tax deductible but are not subject to federal income tax on withdrawal.

7. Earnings accumulate tax-deferred and may be withdrawn tax-free if:

* The withdrawal occurs more than five years after the individual first contributed to the Roth IRA; and

* The individual is at least 59.5 years old, disabled, dead, or the funds are used to purchase a first home.

8. The 10% premature distribution tax penalty for withdrawals of earnings before age 59.5 will be waived for qualified higher education expenses, first-time home purchases, disability, death and certain medical expenses.

9. Your eligibility to contribute to a Roth IRA is not dependent on whether you are covered by a retirement plan at work.

10. Dividends grow tax-free. Did I say Tax Free!!!

11. Tax-free distributions from the Roth IRA are permitted prior to age 59 for disability and/or first-time home purchases (up to a lifetime limit of $10,000), as long as the money has been in the account for five years.

12. Converting Traditional IRAs to a Roth IRA:

* You can convert your Traditional IRAs to a Roth IRA, using special rules developed by the IRS.

* Amounts in Traditional IRAs can be transferred to Roth IRAs provided the tax payer’s Adjusted Gross Income is $100,000 or less for the year in which the transfer is made.

* Part of the transferred amount is subject to income tax, but is exempt from IRS early withdrawal penalties.

13. Individuals can have both a traditional IRA and a Roth IRA, but they cannot contribute more than the combined maximum to these accounts (for example, in 2006 an individual age 49 or below may contribute a total of $4,000 to both IRA accounts, not $4,000 for each account). Individuals who are not eligible for deductible contributions to a traditional IRA or are not eligible for a Roth IRA may still make nondeductible contributions to a traditional IRA.

14. You can take your contributions out if you need to, without penalty.. You cannot remove any “earnings”, but contributions. So let’s say you put $20,000 in over a few years and decide you now need the money, you can remove the $20,000, but not any earnings that have accumulated. You see, you already paid tax on the contributions, so there is no penalty. Check with your personal tax adviser about this for the current laws.

15. You can use a Roth as a college fund for your kids. This works because you can withdraw all the contributions to pay for college expenses, and just let the earnings roll over. The earnings can be withdrawn penalty-free as long as the account has been open for five years, but you’ll still have to pay taxes. So if your son or daughter needs the money, it can be had. But if it is not needed — because they don’t go to college or because they got a scholarship — your retirement looks great! Good idea?

16. Use a Roth IRA as a home emergency fund. Why not, you can get the money you put in back any time, but the earnings in there would keep on compounding tax free. What a deal! ( this could backfire depending on market volatility of course)

Remember my recent post on it not being too late to contribute to a Roth IRA, the idea of saving on your taxes may not seem that important, but it really pays off. If a 25-year-old puts in $5,000 each year until he retires and makes an average annual return of 8% on his investment, he’ll have $1.4 million saved by the time he retires at age 65. And the money is all his, he won’t have to give the IRS a any of it if as long as he waits until retirement to take the earnings out.
If you have a question that you can’t find the answer to, email me and I will try to help. I may not know the answer, but I will try to help. I do enjoy helping people understand these things.

12 comments to 16 Roth IRA Facts

This is a pretty comprehensive list. I think you should mention more about the rules when a Roth IRA is inherited.. There are some specific things that must be done to assure that the money can stay in the account and grow tax free.

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